Advance subscription agreements in the accounts

Q: Which FRS 102 paragraphs decide the classification?

Two paragraphs in Section 22 have to be read together. Paragraph 22.7(b) says that if a company receives cash before the equity instruments are issued, and it cannot be required to repay the cash, it recognises the increase in equity to the extent of the consideration received. Paragraph 22.3 defines a financial liability. Part (b)(i) includes a non derivative contract under which the company is or may be obliged to deliver a variable number of its own equity instruments. Paragraph 22.7(b) deals with timing where money arrives early. Paragraph 22.3 decides whether the contract is equity at all. An ASA that is non refundable but settles in a number of shares that depends on a future price meets the liability definition, even though no cash will ever go back to the investor. The general framework is explained on the page on FRS 102 Section 22.

Q: When is an ASA equity and when is it a liability?

ASA termLikely classification under FRS 102 Fixed number of shares at a price agreed when the ASA is signed, no refundEquity under paragraph 22.7(b), because the number of shares does not vary Shares issued at the next round price, or that price less a discountFinancial liability under paragraph 22.3(b)(i), because the number of shares depends on a price not yet known Round price with a fallback valuation on the long stop dateFinancial liability, because which price applies, and so how many shares are issued, is still uncertain Any right to a refund, for example if the round failsFinancial liability, and also outside HMRC's conditions for SEIS and EIS Most ASAs used ahead of a seed round fall into the second or third rows, because the whole point is to avoid fixing a price before the round. The classification should be decided from the signed agreement, not from the label on it.

Q: What does it look like in the numbers?

Illustration only. A company with a 31 December year end signs an ASA in December and receives £100,000. The ASA converts at the next round price less 20%. In February the round completes at £2.00 a share, so the investor receives shares at £1.60. With a nominal value of 1p, that is 62,500 shares. DateEntryDebitCredit DecemberBank£100,000 DecemberCreditors: advance subscriptions£100,000 FebruaryCreditors: advance subscriptions£100,000 FebruaryShare capital (62,500 x 1p)£625 FebruaryShare premium£99,375 The illustration assumes the directors concluded the liability is carried at the cash received at the year end. If they had concluded it was a Section 12 instrument with a higher fair value, the difference would have gone through profit or loss in December.

Money received under an advance subscription agreement (ASA) is not share capital until the shares are allotted. Under FRS 102 it is shown in equity only if the company cannot be made to repay it and the agreement does not oblige the company to deliver a variable number of shares; an ASA priced by reference to the next funding round usually does oblige that, so it sits in creditors until the shares are issued. Micro entities using FRS 105 apply a simpler test and normally show the money in equity.

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Why does an ASA need its own accounting treatment?

An ASA is used to bank investor money before a round is priced. The investor pays now and the shares are issued later, usually at the next round price less a discount, or at a fallback price on a long stop date. In between, the company holds cash but has allotted nothing: there is no entry in the register of members and no return of allotment. The accounts still have to say what the money is.

The terms HMRC expects for SEIS and EIS shape the answer. HMRC’s Venture Capital Schemes Manual (VCM12025 for EIS and VCM33025 for SEIS) says it will not regard an ASA as suitable unless the payment cannot be refunded in any circumstances, the agreement cannot be varied, cancelled or assigned, it bears no interest and it has a long stop date, which HMRC generally expects to be no more than six months after signing. The scheme conditions are covered on the page on advance subscription agreements; this page deals only with the investee company’s accounts.

Which FRS 102 paragraphs decide the classification?

Two paragraphs in Section 22 have to be read together.

Paragraph 22.7(b) says that if a company receives cash before the equity instruments are issued, and it cannot be required to repay the cash, it recognises the increase in equity to the extent of the consideration received.
Paragraph 22.3 defines a financial liability. Part (b)(i) includes a non derivative contract under which the company is or may be obliged to deliver a variable number of its own equity instruments.

Paragraph 22.7(b) deals with timing where money arrives early. Paragraph 22.3 decides whether the contract is equity at all. An ASA that is non refundable but settles in a number of shares that depends on a future price meets the liability definition, even though no cash will ever go back to the investor. The general framework is explained on the page on FRS 102 Section 22.

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When is an ASA equity and when is it a liability?

ASA term	Likely classification under FRS 102
Fixed number of shares at a price agreed when the ASA is signed, no refund	Equity under paragraph 22.7(b), because the number of shares does not vary
Shares issued at the next round price, or that price less a discount	Financial liability under paragraph 22.3(b)(i), because the number of shares depends on a price not yet known
Round price with a fallback valuation on the long stop date	Financial liability, because which price applies, and so how many shares are issued, is still uncertain
Any right to a refund, for example if the round fails	Financial liability, and also outside HMRC’s conditions for SEIS and EIS

Most ASAs used ahead of a seed round fall into the second or third rows, because the whole point is to avoid fixing a price before the round. The classification should be decided from the signed agreement, not from the label on it.

How is a liability ASA measured?

Once the ASA is a financial liability, the company must decide whether it is a basic instrument under Section 11 or falls into Section 12. Paragraph 11.8 treats a debt instrument as basic only if it meets the conditions in paragraph 11.9, which are written around returns of a fixed amount or a fixed or variable interest rate, or if it is consistent with the description in paragraph 11.9A. An obligation to deliver shares worth a discounted round price does not fit those conditions easily, and the directors need to make and document a judgement.

If the ASA falls into Section 12, paragraph 12.7 measures it at fair value on initial recognition, normally the transaction price, and paragraph 12.8 requires fair value at each reporting date with changes in profit or loss. The fair value of the obligation reflects the value of the shares the investor expects to receive, so a discount to the round price can produce a fair value loss before the round completes. See FRS 102 Section 12.

A liability ASA is presented within creditors, normally due within one year given the short long stop date HMRC expects. It should be described clearly, for example as advance subscriptions for shares, and not as a loan, because it carries no interest and no repayment right.

What happens when the shares are issued?

When the round completes or the long stop date arrives, the shares are allotted and the ASA is settled.

Liability ASA. Paragraph 22.8A(c) says that where a financial liability is extinguished by issuing equity instruments in accordance with the original terms of the liability, paragraph 22.8 does not apply and no gain or loss arises. The carrying amount moves to share capital and share premium.
Equity ASA. The amount already in equity is reallocated from the separate line to share capital and share premium.

Either way, section 610(1) of the Companies Act 2006 requires the excess over nominal value to go to the share premium account, and section 555 requires a return of allotment within one month of the allotment; see allotting shares. Costs of the issue are deducted from equity under paragraph 22.9, as explained on the page on share issue costs. For the investors, HMRC says SEIS or EIS relief is available only from the date the shares are issued, and the compliance statement must not be submitted before then; see SEIS.

What changes for a micro entity using FRS 105?

FRS 105 does not contain the variable number of shares test. Paragraph 17.5 classifies an instrument as a liability where the micro entity does not have an unconditional right to avoid settling an obligation in cash or another financial asset, and paragraph 17.7(a) repeats the rule that non refundable cash received before shares are issued is recognised in equity. A non refundable ASA is therefore normally equity for a micro entity. Paragraph 17.8A(c) gives the same no gain or loss rule as FRS 102 where a liability is settled in shares under its original terms.

What does it look like in the numbers?

Illustration only. A company with a 31 December year end signs an ASA in December and receives £100,000. The ASA converts at the next round price less 20%. In February the round completes at £2.00 a share, so the investor receives shares at £1.60. With a nominal value of 1p, that is 62,500 shares.

Date	Entry	Debit	Credit
December	Bank	£100,000
December	Creditors: advance subscriptions		£100,000
February	Creditors: advance subscriptions	£100,000
February	Share capital (62,500 x 1p)		£625
February	Share premium		£99,375

The illustration assumes the directors concluded the liability is carried at the cash received at the year end. If they had concluded it was a Section 12 instrument with a higher fair value, the difference would have gone through profit or loss in December.

What should the notes say?

The accounting policy note should state how ASA money is classified and why. If the round completes after the year end but before the accounts are approved, paragraph 32.11(f) lists issues of equity instruments as a non adjusting event that would generally be disclosed, and a small company must give the nature and financial effect of material post year end events under paragraph 1AC.39. If a director or their family has invested, the related party rules may also apply.

What mistakes come up most often?

Crediting share capital and premium when the cash arrives, before any shares are allotted.
Treating every ASA as equity simply because the money is non refundable.
Describing the ASA as a loan and accruing interest it does not carry.
Leaving the balance in creditors after the shares have been issued and the return of allotment filed.
Using an ASA to convert an existing loan into shares, which HMRC says will not be eligible for SEIS or EIS.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.